REGULATION CC FINAL RULE TO BECOME EFFECTIVE
At long last, the Federal Reserve Board issued a final rule amending Regulation CC – Expedited Funds Availability and Collection of Checks. Issued in June of 2017, the rule becomes effective July 1, 2018. As everyone knows, Reg. CC implements the Expedited Funds Availability Act of 1987 (EFA Act) and the Check Clearing for the 21st Century Act of 2003 (Check 21 Act) which dealt with prompt funds availability for deposited items and collection and return of paper checks and substitute checks. In this latest rule, the Board modified subparts A, B and C of the regulation to recognize today's environment in which almost all check collection and returns are handled electronically and to encourage all banks to receive, send, and return the few remaining paper checks electronically. In brief, the Board retained the current same-day settlement rule for paper checks, applied Reg. CC's existing check warranties under subpart C to checks that are collected electronically, and adopted new warranties and indemnities related to checks collected and returned electronically and to electronically-created checks. The changes will be particularly helpful in sorting out who is responsible for double presentment when a check is deposited via remote deposit capture (RDC) and (somehow by hook or crook) the original check is also deposited somewhere. In this article, we will provide a little background and then summarize the major changes contained in the new rule.
Background. As a refresher, Reg. CC is divided into subparts. Subpart A contains general information including definitions of terms. Subpart B specifies the times within which banks must make funds available for withdrawal and exceptions to those availability schedules, bank disclosure requirements for their funds availability policies, and payment of interest. Under the Dodd Frank Act, the Fed shares jurisdiction with the CFPB for writing subpart B. Subpart C implements the EFA Act's provisions regarding forward collection and return of checks.
The current provisions of subpart C presume that banks generally handle checks in paper form and include provisions to speed the collection and return of checks, such as the expeditious return requirements for paying and returning banks, authorization to send
returns directly to depositary banks, notification of non-payment of large-dollar returned checks, standards for check indorsement, and specifications for same-day settlement of checks presented to the paying bank.
The Check 21 Act, which became effective in October 2004, facilitated electronic collection and return of checks by permitting banks to create a paper "substitute check" from an electronic image and electronic information derived from a paper check. The Check 21 Act authorized banks to provide substitute checks to a bank or a customer that had not agreed to electronic exchange.
Return Requirements. Regulation CC requires a paying bank that determines not to pay a check to return the check expeditiously. Under the current rule, a paying bank must return the check under either the "two-day test" or the "forward-collection test." A paying bank may send a returned check either directly to the depositary bank or to any bank agreeing to handle the return expeditiously. The current rule also requires a paying bank that decides not to pay a check of $2,500 or more to provide a notice of nonpayment to the depositary bank in a manner so that the notice is received by the depositary bank within the same "two-day test" timeframe for expeditious return.
Of course, the original rule was written at a time when check processing was almost entirely paper-based. Today, check clearing is almost entirely electronic. The Fed says that by the beginning of 2017, more than 99.99 percent of checks received by Fed. Reserve Banks were received electronically from 99.06 percent of routing numbers and over 99.99 percent of checks were presented to paying banks electronically to over 99.76 percent of routing numbers. A small portion of check returns, however, are still conducted using paper. By the beginning of 2017, Fed. Reserve Banks received 99.63 percent of returned checks electronically from over 99.37 percent of routing numbers and delivered 99.41 percent of returned checks electronically but to only 92.84 percent of routing numbers. I guess there are still a few holdouts.
In the final rule, the Board required all returned checks, both paper and electronic, to satisfy a modified version of the "two-day test." They must be returned in an expeditious manner so that the check would normally be received by the depositary bank not later than 2 p.m. (local time of the depositary bank) on the second business day following the banking day on which the check was presented to the paying bank. The Board also added a new condition for expeditious-return liability, saying that a paying bank and returning bank may be liable to a depositary bank for failing to return a check in an expeditious manner only if the depositary bank has commercially reasonable means in place for receiving check returns electronically, either directly or indirectly through an intermediary or correspondent. The Board believes this will provide incentives to depositary banks to receive electronic returns by preserving their ability to make a claim that a check was not returned expeditiously only if they actually receive electronic returns. The final rule also provides that if a paying bank decides not to pay a check of $5,000 or more (up from the current $2,500 threshold), it must provide a notice of non-payment in a manner so that the notice would be received by the depositary bank by 2 p.m. (rather than the current deadline of 4 p.m.) on the second business day following the banking day on which the check was presented to the paying bank.
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